Apparently the PBOC shifted their tone on the Yuan on their website yesterday and traders have begun to pay attention today. According to the FT, The People’s Bank of China said foreign exchange policy would take into account “capital flows and major currency movements”, a pointed reference to the large speculative inflows of capital that China is receiving and US dollar weakness (though the FT story totally misses the plot regarding the impact of that shift…).
Pressure from other Asian nations is likely having as much impact on China as the pressure from the US. Asian central banks have spent billions accumulating reserves to keep their currencies stable against the USD/linked Yuan. If the yuan is allowed to strengthen, the regional central banks will not have to buy dollars to the same extent, if at all.
The market presumes that if the dollar were allowed to fall against artificially weak Asian currencies it would likely strengthen against the rest of the majors, which to date, have acted as a sort of escape valve for USD weakness.
Geithner’s more insistent tone on the strong dollar policy coupled with Asian calls for Chinese currency flexibility, appear to be beginning to bear fruit. Keep that in mind before mindlessly selling the dollar; the game may be changing.
